Bond Traders Are Passing Around This Report That Says The Fed Has Hit 'Ctrl-Alt-Delete' On Tapering

We've received emails from a few different Wall Street bond
trading desks this morning about a new report from Medley Global
Advisors arguing that at its September FOMC meeting, the Federal
Reserve made it much more difficult to justify tapering its
quantitative easing program going forward.

In the report — titled "Fed: Ctrl-Alt-Delete" — Medley
analysts Regina Schleiger and Jeremy Torobin write
that, "more than simply standing pat, the Federal Open
Market Committee has effectively hit the reset button and is back
where it was six months ago — at the very start of a long process
of building the case for a downward adjustment to the Large-Scale
Asset Purchase program."

Schleiger and Torobin continue:

Moreover, that eventuality is now a riskier proposition
(and, consequently, the process of getting back to within
striking distance is more difficult) because of troubling signs
that economic momentum is slowing.

The potential costs to
financial stability of continuing purchases at the current
$85-billion per month may, down the road, start flashing red and
embolden FOMC hawks to push for an aggressive conclusion of the
program. But right now the potential costs of withdrawing even
the slightest bit of support from the economy appear much greater
than they were.

In other words, for proponents
of asset purchases, the cost-versus-efficacy calculation that
figures into their votes each meeting is now chiefly about
assessing the impact of slowing purchases, rather than of
continuing them.

This week's non-farm payrolls
report from September merely underscored a weakening trend that
was already underway when FOMC members met last month and decided
against tapering.

That sluggishness surely
carried over (and probably accelerated) into October thanks to
the 16-day government shutdown, and it validates the committee's
skittishness about whether the economy could withstand another
spike in mortgage rates. Indeed, the National Association of
Realtors' latest reading of US existing-home sales,
reported on
Monday, brought more
evidence of a cooler housing sector.

The FOMC holds its next policy
meeting next week. Almost everyone says there is virtually zero
chances of the Fed announcing the beginning of tapering at that
meeting.

Schleiger and Torobin obviously agree.

"The
FOMC's October 29-30 gathering in
Washington will almost certainly produce a status-quo decision,"
say the Medley analysts. "Three weeks later, the published
minutes from that meeting may reveal little more than a policy
committee essentially paralyzed pending sufficient data that is
not contaminated or muddied by the shutdown to gauge whether
September and October will be remembered as another brief 'soft
patch' or something worse."

In short, the Fed may have
missed its chance.

"The witch's brew of a labor
market that was weaker even before the shutdown and debt-ceiling
drama, growth that has disappointed and which was supposed to be
accelerating already, and price gains so persistently meager that
disinflation could soon take on a central role in the FOMC
conversation, mean the bar for any change is higher than it has
been for some time," concludes the report.